How Empty Offices Could Spell Trouble for Banks: The Looming Real Estate Crisis

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How Empty Offices Could Spell Trouble for Banks: The Looming Real Estate Crisis

Apr 27, 2023 | News | 0 comments

The Economist warns of an upcoming banking crisis caused by a chain of unfavorable events, leading to a disastrous situation for commercial real estate investors, landlords, and their financiers. The remote and hybrid work trend has resulted in building owners accepting the fact that their office properties are unlikely to fill up again, causing their worth to decrease by half. With high-interest rates and decreasing occupancy, refinancing will be challenging, and some property owners may surrender their properties, leaving banks with numerous offices to sell at significant discounts, evoking memories of the global financial crisis.

Morgan Stanley forecasts that over $1.5 trillion of U.S. commercial debt will need renegotiating in two years amid a liquidity shortage and stricter lending standards from the recent banking crisis. Interest rates have surged 450 basis points in a year, and delinquencies could reduce real estate values by 40%, surpassing the Great Financial Crisis. The number of loans coming due will escalate until 2027, with a peak of $550 billion, while banks possess over 50% of commercial mortgage-backed securities with reduced value.

According to Goldman Sachs, smaller banks with assets less than $250 billion, which make up around 80% of commercial real estate lending, are at the greatest risk. Approximately 400 midsize US banks have three times more loans in commercial real estate than safer investments, making them vulnerable to significant losses if leases aren’t renewed, causing property values to drop. If this occurs, it could lead to a loss of depositor and investor confidence in the financial stability of these banks and possibly result in runs similar to what happened to Silicon Valley Bank and Signature last month. It remains to be seen if the government will rescue hundreds of failing banks.

Although office vacancies have been a problem for the past two years, the commercial real estate sector is composed of multiple sectors, and banks have yet to suffer from commercial delinquencies. According to Tim Mullaney at CNBC, other commercial sectors such as industrial and warehouse space have low vacancy rates, hotels are doing well, and retail stores are also holding onto their brick-and-mortar presence. It is essential to highlight that Wells Fargo, the primary lender for commercial real estate, had write-offs representing only 0.01% of the bank’s portfolio on commercial loans last year. In contrast, consumer loan write-offs were 39 times more significant. Therefore, before becoming anxious about banks, it’s important to acknowledge these figures.